- One of the first ways people usually considerto raise money is to turn to their friends and familyto lend them the capital they need to start their company.It often sounds like a great idea,because those people are easily accessibleand want to see you happy and successful.But the nature of the relationship itself,and the fact that those people are so close to you,is actually what makes itthe most dangerous ways to raise money.When you raise funds through professional investors,everyone knows what the stakes are,what the potential upside is and, of course,the hard reality that 80 percentof all startups fail eventually,and that there is a very real riskof losing your entire capital.

With friends and family, it is actually quite different.Their motivation to invest in your businessis actually related to the fact that they want youto succeed or to send you the messagethat they believe in you and want to support youin your entrepreneurial efforts.They might even be reluctant to give you their opinion,if it's negative, so as not to demotivate youor have you thinking that they're not supporting you.Usually, it even goes one step further,which is that friends and family can be reluctantto do any paperwork to formalize your agreement.

When you're in that first phase,where everything is still possible,everyone is very happy.You're getting the money, and your friends and familyare happy to help you, but usually things get complicatedfurther down the road.The question is, what happens if your companymeets difficulties, and you're not able to repay the loan?Is that going to be an issue?If your company files for bankruptcy,do you expect to repay the loan anyway?Those are all questions that need to be answered upfront.

When you're dealing with an institution,all of those things are set in stoneas soon as you sign the contract.You know who is responsible for the loan,what will happen if you miss a payment,and the full consequencesof not being able to repay the loan.With friends and family, you need to havethe same level of rigor in the borrowing processand define all those things.The benefit of doing so is that if things do turn sour,then there is no relationship or family issues added on top,since it will all have been defined in advance.

For example, if you're having temporary difficulties,you need to define how you will handle it.Will you stop the monthly payment for a time,until your finances are better?Is your lender okay with that,and does he have the financial stability requiredto live without that money?If your company files for bankruptcy,will you be repaying the loan or not, and if so,will it be okay for your lender to waituntil you have a new source of income to repay the loan?Will they accept a smaller monthly paymentover a longer period of time?And even if you do, remember that those peopleare your friends and family, and they might, therefore,have an opinion on how you use your money.

For example, they could be okay to reduceyour monthly burden and take it on themselvesto let you repay the loan over a longer period of time,but they might also feel badif they see you going out or on vacation,instead of paying them in an accelerated way.You, of course, might feel like this isa well-deserved night out or vacation,but chances are they will see it in a very different light.They might feel like they are financing your vacation.Those are things you need to take into considerationwhen borrowing money from friends and family.

Getting the money is usually the easy part,but the consequences down the road can be terrible.So, what's the best way to borrow moneyfrom friends and family?First, you need to treat them like strangers,as far as paperwork is concerned.Don't fall into the trap of believingthat oral agreements are sufficient,just because you know each other.Then, protect their interests better than they will.As I said earlier, they will not want toprotect their own interests,so as not to lead you to believe they mistrust you.

So, you have to do the job and insist onputting everything on paper.Go over every possible outcome, and then put in writingthe way you will manage it.It is so important that I will say it again.Put everything in writing.Don't rely on your memory or theirsto know what was originally said.And by the way, even if we all had good memories,we also all have different interpretations of what we say.Putting things in writing helps a lotin clarifying the agreement.

Even if that document might not have a legal value,it will be a great way to preserve your relationships.Borrowing money from friends and family is a dangerous game.If you must do it to get started,or if there's no other way to get your company on its way,then do it, but put it all in writing and defendthe interests of your friends and family as your own.

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Author

Released

11/27/2014

Entrepreneurs need capital to achieve their business goals and meet significant milestones, whether they're launching a new product, acquiring key customers, or reaching a revenue goal. In this course, author and entrepreneur Rudolph Rosenberg provides an overview of the main avenues to raising capital (such as crowdfunding, angel investors, venture capital, and more), identifies the key stakeholders, and shows the best ways to market your project and ask for funding.

Topics include:

List three variables that will affect the source of capital you choose to fund your company.

Identify the best strategy most entrepreneurs can use for finding capital and investors for their company.

Name two elements an entrepreneur must consider when determining the amount of capital their business will need.

Cite two details that should be included in a business plan to help investors become familiar with what they will be funding and the term of their investment.

Explain what the JOBS Act did to facilitate crowdfunding for entrepreneurs.